Microeconomics 110 Exam 1.3, Econ 110 Exam 2 Review Zirlott, EC 110 Exam 2 Zirlott, EC 110 Exam 2 Zirlott

Price Elasticity of Demand

measures how much Quantity demanded responds to a change in Price. Loosely speaking, measures the price sensitivity of buyers' demand.

"Elastic Demand" Curve

>1, relatively flat, consumers' price sensitivity is relatively high

"Elastic Supply" Curve

>1, relatively flat, sellers' price sensitivity relatively high.

Which of the following is NOT a potential impact of a rent ceiling set below the equilibrium rent?

A Surplus

Suppose there are four firms that are willing to sell one unit of a good. Each firm has a different minimum price that they are willing to sell for: Firm A $6, Firm B $7, Firm C $10 and Firm D $12. If the market price is $11 then the total producer surplus is

$10

If a consumer is willing and able to pay $20 for a particular good and if he pays $16 for the good, then for that consumer, consumer surplus amounts to $4. $16. $20. $36.

$4.

Pam buys only thread and fabric, and she buys the quantities that maximize her utility. Her marginal utility from a spool of thread is 30 units and her marginal utility from a yard of fabric is 60 units. If the price of a spool of thread is $4, then you are sure that the price of a yard of fabric is

$8

How to calculate Price Elasticity using midpoint method

(Q2-Q1)/[(Q2+Q1)]/2] / (P2-P1)/[(P2+P1)/2] Do NOT use negative numbers.

Elasticity

-measures how much one variable responds to changes in another variable. a numerical measure of the responsiveness of Quantity demanded or Quantity supplied to one of its determinants.

Suppose there is a 5% increase in the price of good X and there is a resulting 9% decrease in the quantity good X demanded. Price elasticity of demand for X is

1.8

Nick can purchase a milkshake for 2$. For the first milkshake purchased nick is willing to pay 4$, for the second milkshake 3$, for the third milkshake 2$ and the fourth milkshake 1$. What is the value of Nick's consumer surplus for the milkshakes he buys?

3$

"Inelastic Demand" Curve

<1, relatively steep, Consumers' price sensitivity relatively low

"Inelastic Supply" Curve

<1, relatively steep, sellers' price sensitivity is relatively low.

"Perfectly Inelastic Demand" Curve

=0, vertical, consumers' price sensitivity: none example: insulin to a diabetic

"Perfectly Inelastic Supply" Curve

=0, vertical, sellers' price sensitivity none. Example: seats in Bryant Denny Stadium or seat in a classroom, it is a fixed number.

"Unit Elastic Demand" Curve

=1, intermediate slope, price sensitivity intermediate, price and quantity changed by the same percentage - this cancels out any change in revenue (Total Revenue stays the same).

"Unit Elastic Supply" Curve

=1, intermediate slope, sellers' price sensitivity intermediate.

"Perfectly Elastic Demand" Curve

=infinity, horizontal, price sensitivity extreme. example: a fisherman tries to sell his fish higher than market price, so he won't sell a single one.

"Perfectly Elastic Supply" Curve

=infinity, horizontal, sellers' price sensitivity extreme. Examples are not the same as demand.

A rent ceiling creates a shortage. As a result, which of the following occurs?

A loss of both consumer and producer surplus.

What happens to consumer surplus in the iPod market if iPods are normal goods and buyers of iPods experience an increase in income? Consumer surplus decreases. Consumer surplus remains unchanged. Consumer surplus increases. Consumer surplus may increase, decrease, or remain unchanged.

Consumer surplus may increase, decrease, or remain unchanged.

A price ceiling is a price

Above which a seller cannot legally sell.

Perfectly elastic demand implies that

Any raise in price above that represented by the demand curve will result in no output demand.

A price ceiling is BINDING when it is set

Below the Equilibrium price, causing a shortage.

A price floor is a price

Below which a seller cannot legally sell, and that creates a surplus of the good if its set above the equilibrium price.

The opportunity cost of buying a good includes I. The price of the good. II.The value of time spent searching for the good.

Both I and II.

Mark's marginal utility from reading books is_____when he reads____.

Change in total utility; One additional book.

International trade arises from

Comparative Advantage.

If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets? Consumer surplus increases. Consumer surplus decreases. Consumer surplus will not change consumer surplus; only producer surplus changes. Consumer surplus depends on what event led to the increase in the price of oak lumber.

Consumer surplus decreases.

When the price of a good falls,

Consumer surplus rises but existing buyers gain an extra benefit and new buyers will now purchase the product.

The decrease in consumer surplus and producer surplus that results for an inefficient level of production is called

Deadweight Loss

Tax incidence is the

Division of a tax burden between the buyer and sellers

A cost borne not by the producer but by other people is called_______ cost.

External

Availability of close substitutes

Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others. For example, butter and margarine are easily substitutable.

Imposing a minimum wage that is above the equilibrium wage rate results in

Higher job search costs

Jacks consumption possibilities are defined by

His income and the price of the good that he consumes.

A tariff is a tax imposed by the_____country when a_____ good crosses international boundary.

Importing; Imported

If the price of the good falls, before the amount consumed changes the marginal utility per dollar from that good

Increases

Suppose the demand for peanuts increases. What will happen to producer surplus in the market for peanuts? It increases. It decreases. It remains unchanged. It may increase, decrease, or remain unchanged.

It increases.

A person's consumption possibilities is defined by the budget line because

It marks the boundary between what is affordable and unaffordable.

Suppose the demand for wine is elastic and that initially 5 million bottles of wine re produced and consumed in the United States. If the Government imposes a tax of $2 per bottle of wine, then the government will collect

Less than $10 million in tax revenue.

Economists using marginal utility theory assumes that consumer's objectives are to

Maximize their total utility.

Economist use the concept of price elasticity of demand to

Measure how much buyers respond to changes in the price of a good.

Currently tire producers must receive a price of 50$ per tire to produce 5000 tires. If the supply curve of the tires is upward sloping, then to produce one additional tire, tire producers will need to receive a price of

More than 50$

Narrowly V. Broadly

Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods. For example, food, a broad category, has a fairly inelastic demand because there are no good substitutes for food.

Necessities V. Luxuries

Necessities tend to have inelastic demands, whereas luxuries have elastic demands. When the price of a doctor's visit rises, people will not dramatically reduce the number of times they go to the doctor, although they might go somewhat less often.

An excise tax of $11 placed on bikes will shift the demand curve

Not at all, but the supply curve will shift to the left.

In general a relatively vertical demand curve is more likely to be

Price inelastic

The relationship between slope and elasticity?

Slope is a ratio of two changes Elasticity is a ratio of two % changes. THE FLATTER THE CURVE, THE BIGGER THE ELASTICITY. THE STEEPER THE CURVE, THE SMALLER THE ELASTICITY.

A tax is placed on tobacco producers will shift

Supply to the left, causing equilibrium price to be eased and equilibrium price to fall.

A sales tax imposed on the seller shifts the supply curve to the left for the taxed good because the

Tax is paid by the seller to the government and is therefor, like cost of production.

Consumer surplus is

The amount the consumer was willing to pay minus the amount the consumer paid.

How's a sales tax divided between buyers and seller is determined by

The elasticity's of supply and demand.

A price floor is

The lowest legal price that can be charged for a particular good or service

Marginal cost is

The opportunity cost of producing one more unit.

A tax is imposed on the sale of a product. As long as neither the supplier nor the demand is perfectly elastic or inelastic,

The price paid by the consumer's increases by less than the amount of the tax.

The price elasticity of supply measures how much

The quantity supplied responds to changes in the price of a good

Utility is defined as

The satisfaction from consuming a good.

We can say that the allocation of resources is efficient when

The sum of producer surplus and consumer surplus is maximized

The principle of diminishing marginal utility says that the

Total utility decreases as the quantity of the good increases.

Consumer surplus is the___________summed over the quantity bought.

Value of a good or service minus the price paid for the good or service

-Elastic Demand -Inelastic Demand -Unit Elastic Demand -Perfectly Elastic Demand -Perfectly Inelastic Demand

What are the 5 types of elasticity of demand?

-Availability of close substitutes -Necessities V. Luxuries -Broadly or Narrowly the good is -Time Horizon

What are the determinants of Elasticity of Demand?

-Time Horizon -Varieties

What are the determinants of Elasticity of Supply?

>1, % change in Quantity is greater than % change in Price. Fall in revenue from lower Quantity is greater than the increase in revenue from higher Price, so REVENUE FALLS.

What happens to Total Revenue if Price Elasticity of Demand is Elastic?

<1, fall in revenue from lower Quantity is smaller than the increase in revenue from higher Price, so REVENUE RISES.

What happens to Total Revenue if Price Elasticity of Demand is Inelastic?

because it doesn't matter which number you use as the "start" and which as the "end"

Why is the mid-point method better for calculating?

Suppose good X has a positive income elasticity of demand. This implies that good X is

a Normal Good.

Producer surplus is the area under the supply curve. between the supply and demand curves. below the price and above the supply curve. under the demand curve and above the price.

below the price and above the supply curve.

Total surplus is represented by the area under the demand curve and above the price. above the supply curve and up to the price. under the supply curve and up to the price. between the demand and supply curves up to the point of equilibrium.

between the demand and supply curves up to the point of equilibrium.

Suppose that the market price for pizzas increases. The increase in producer surplus comes from the benefit of the higher prices to: only existing sellers who now receive higher prices on the pizzas they were already selling. only new sellers who enter the market because of the higher prices. both existing sellers who now receive higher prices on the pizzas they were already selling and new sellers who enter the market because of the higher prices. Producer surplus does not increase; it decreases.

both existing sellers who now receive higher prices on the pizzas they were already selling and new sellers who enter the market because of the higher prices.

If a consumer places a value of $15 on a particular good and if the price of the good is $17, then the consumer has consumer surplus of $2 if he or she buys the good. consumer does not purchase the good. market is not a competitive market. price of the good will fall due to market forces.

consumer does not purchase the good.

On a graph, the area below a demand curve and above the price measures producer surplus. consumer surplus. deadweight loss. willingness to pay.

consumer surplus.

On a graph, the area below a demand curve and above the price measures: producer surplus. consumer surplus. deadweight loss. willingness to pay.

consumer surplus.

If the demand for leather decreases, producer surplus in the leather market increases. decreases. remains the same. may increase, decrease, or remain the same.

decreases.

If a market is allowed to move freely to its equilibrium price and quantity, then an increase in supply will increase consumer surplus. reduce consumer surplus. not affect consumer surplus. Any of the above are possible.

increase consumer surplus.

If a market is allowed to adjust freely to its equilibrium price and quantity, then an increase in demand will increase producer surplus. reduce producer surplus. not affect producer surplus. Any of the above are possible.

increase producer surplus.

When the supply of a good increases and the demand for the good remains unchanged, consumer surplus decreases. is unchanged. increases. may increase, decrease, or remain unchanged.

increases.

A minimum wage

is a price floor in the labor market

All of the following statements about marginal benefit are correct Except the marginal benefit of a good

is equal to zero when resource use is efficient.

Consumer surplus is closely related to the supply curve for a product. is represented by a rectangle on a supply-demand graph when the demand curve is a straight, downward-sloping line. is measured using the demand curve for a product. does not reflect economic well-being in most markets.

is measured using the demand curve for a product.

Price Sensitivity

is the degree to which the *price* of a product *affects consumers' purchasing behaviors.*

When demand is perfectly inelastic, the price elasticity of demand

is zero and the demand curve is vertical

Price Elasticity of Supply

it measures sellers' price-sensitivity. measures how much Quantity supplied responds to a change in Price. Calculated the same as Price Elasticity of Demand, using the midpoint method. Will always be positive.

Time Horizon: Demand

longer the time more elastic the demand example. gas, if gas prices rise the demand falls only slightly in a few months, but as years go by, people buy more fuel efficient cars and use public transport instead

Market power and externalities are examples of laissez-faire economics. public policy. market failure. welfare economics.

market failure.

When markets fail, public policy can do nothing to improve the situation. potentially remedy the problem and increase economic efficiency. always remedy the problem and increase economic efficiency. in theory, remedy the problem, but in practice, public policy has proven to be ineffective.

potentially remedy the problem and increase economic efficiency.

Moving production from a high-cost producer to a low-cost producer will lower total surplus. raise total surplus. lower producer surplus. raise producer surplus but lower consumer surplus.

raise total surplus

Consumer surplus is a good measure of economic welfare if policymakers want to maximize total benefit. minimize deadweight loss. respect the preferences of sellers. respect the preferences of buyers.

respect the preferences of buyers.

A supply curve can be used to measure producer surplus because it reflects the actions of sellers. quantity supplied. sellers' costs. the amount that will be purchased by consumers in the market.

sellers' costs.

Market failure is the inability of buyers to interact harmoniously with sellers in the market. a market to establish an equilibrium price. buyers to place a value on the good or service. some unregulated markets to allocate resources efficiently.

some unregulated markets to allocate resources efficiently.

Welfare economics is the study of how the allocation of resources affects economic well-being. a price ceiling compares to a price floor. the government helps poor people. a consumer's optimal choice affects her demand curve.

the allocation of resources affects economic well-being.

Total Revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold - P X Q

A market is allocatively efficient if

the sum of the consumer surplus and the producer surplus has been maximized.

Efficiency is attained when total surplus is maximized. producer surplus is maximized. all resources are being used. consumer surplus is maximized and producer surplus is minimized.

total surplus is maximized.

Economists typically measure efficiency using the price paid by buyers. the quantity supplied by sellers. total surplus. profits to firms.

total surplus.

A seller's opportunity cost measures the value of everything she must give up to produce a good. amount she is paid for a good minus her cost of providing it. consumer surplus. out of pocket expenses to produce a good but not the value of her time.

value of everything she must give up to produce a good.

At the equilibrium price of a good, the good will be purchased by those buyers who value the good more than price. value the good less than price. have the money to buy the good. consider the good a necessity.

value the good more than price.

The maximum price that a buyer will pay for a good is called the cost. willingness to pay. equity. efficiency.

willingness to pay.

Another way to think of the marginal seller is the seller who will accept the lowest price of any seller in the market. requires the highest price of any potential seller in the market. would leave the market first if the price were any lower. would leave the market last if the price falls.

would leave the market first if the price were any lower.